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Changes in VAT collection have helped raise a smile among dealers counting the cost of extra National Insurance contributions that will have to be paid next year when chancellor Gordon Brown's budget is implemented.

Lack of discretion shown by Customs and Excise in returning VAT payments has broken many businesses during downturns, prompting Brown to relieve VAT payments on bad debts and abolish automatic fines for late payment.

Although the rise in NI contributions will affect all businesses, Paul Bean, general manager of operations at services reseller Allied Worldwide, believed the VAT changes could prove vital to struggling resellers.

"It has to be a good thing. The VAT men are like the Wyatt Earp of the government and won't leave you alone or even understand any of the difficulties that small businesses face," he argued.

More than 700,000 firms could benefit from plans to abolish automatic fines on late payments and VAT relief on bad debts.

Industry associations claimed the budget's introduction of a research and development tax credit at a net rate of 7.5 per cent was a step in the right direction in providing an extra incentive for world-leading technology companies to focus their R&D activities in the UK.

The Computer Software and Services Association and the Federation of the Electronics Industry welcomed the range of measures designed to encourage small business growth. In particular, they highlighted the reforms of the VAT scheme applying to SMEs and the taxation of intellectual property.

CSSA director general John Higgins commented: "While we would have liked an extension to the current three-year scheme which allows SMEs to write off the purchase of IT equipment, we believe this budget provides a positive basis for future reform."

FEI director general Anthony Parish said: "The industry needs an R&D tax credit rate that provides a real incentive to base research and development activities here - and a net rate of 7.5 per cent represents a sound basis for future growth in this area."

But Peter White, chairman of Hawke Systems, believed the NI increases proposed by the chancellor would bite the hardest. He argued that while everyone had been expecting an increase in NI contributions to fund the NHS, it was "a shame [Gordon Brown] had to put it on business too".

Paul Smart, joint managing director of Crowborough-based reseller Compatibility, agreed. "The increase in National Insurance will put our wage bill up considerably. Margins are tight enough as it is. [We sell to SMEs and] they have got a lot of knowledge about prices now, so we are struggling," he revealed.

Smart admitted the change in corporation tax was a step in the right direction, but said it was not enough to offset the increased wage bill.

"It does not really do anything for UK business. It will be better for big businesses coming into the UK, because they will get their R&D paid for," he stressed.

Smart was also sceptical about Brown's measures to provide SME training funds. "It's a lot of hot air. Actually trying to get your hands on that money is a different kettle of fish," he complained.

"We have training needs because Microsoft keeps changing its products, but unless someone knocks on the door with a bag of money, SMEs cannot get their hands on it," he added.

Bytes Technology Group managing director Neil Murphy suggested the increase in employer NI payments would affect the company's bottom line by about £70,000 a year.

"That could be one, two or three extra employees - but at least we have a year to plan," he commented.

Bob Jones, managing director of Equiinet, criticised the failure to apply the R&D tax credit to small firms.

"Innovation comes from small knowledge-based businesses, not huge unwieldy conglomerates with massive budgets," he said.

"This legislation means the likes of BT will get richer, while smaller companies lose out. The chancellor should extend these credits to smaller companies if he wants to create a nation of successful, advanced businesses, irrespective of size," he added.

Measures for small firms

Automatic relief for VAT on bad debts for small companies

Plan to extend flat rate VAT to more small firms from next April

Small companies will see an immediate corporation tax rate cut from 20p to 19p

Corporation tax starting rate cut from 10p to zero for small firms with profits of less than £10,000

Extra £30m for small companies' training needs

New cash to help small firms get online, including the filing of tax returns

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